Property Investment Strategies
You want to invest in property but you are unsure what property investment strategy is best suited to you. In this article, we cover 10 different types of property investment strategies as well as the pros and cons of each strategy.
- Residential Buy to Let
- Student Buy to Let
- Holiday Lets
- Hotel Lets
- Commercial Property Buy to Let
- Buy to Sell (Flipping Property)
- Commercial to Residential Conversions
- Property Development
- Rent to Rent
Residential Buy to Let
A residential buy to let is pretty much as it sounds – buying a property in order to rent it out to tenants. Relatively safe long-term investment.
Once you buy a property, you aim to make money in two different ways:
Rental yield – what your tenants pay you for rent, take away any maintenance and running costs, like repairs and agent fees.
Capital appreciation – the profit you make if you sell your property for more than you paid for it.
- One of the least risky property investment strategies.
- Easy to get started without expert knowledge.
- Allows you to make consistent rental income, with high rental yields available in certain UK areas.
- Generates two types of return – rental returns and capital growth returns when you sell the property.
- Long-term strategy, therefore not the best choice for those seeking to make large short-term returns quickly.
- Potential quiet periods with no tenants if it’s in an area without high rental demand.
Student Buy to Let
Student buy to let is similar to residential buy to let, but rather than renting it out to standard tenants, instead you would rent it out to students. Many students are looking for stylish and well-situated accommodation to stay in during their studies. This high demand brings great investment opportunities within this space.
- Generate money through rental income and capital appreciation.
- High rental demand with many students seeking accommodation.
- A relatively easy hands-off property investment strategy.
- Potentially more wear and tear than with a residential buy to let.
- There may be times your property is vacant during the summer holidays until the new term starts.
HMO stands for house in multiple occupation. This is when you let your property out to several different people that are not members of the same family.
According to GOV.UK a house is a HMO if the following apply:
- At least 3 tenants live there, forming more than 1 household.
- You share toilet, bathroom or kitchen facilities with other tenants.
And a large HMO if both of the following apply:
- At least 5 tenants live there, forming more than 1 household.
- You share toilet, bathroom or kitchen facilities with other tenants.
- Generate money through multiple different tenants at one time.
- If a tenant doesn’t pay rent, you will still have rental income from all other tenants.
- This type of investment strategy comes with more complex tax rules, planning requirements, and legislative requirements.
- It is harder to get a buy to let mortgage for HMO properties.
- With this type of property investment strategy, there is more management involved making it more time-consuming.
Holiday lets are another form of buy to let property investment strategy that many investors go for. This involves again buying a property and renting it out for income, but this time you are renting it out on a short-term basis to those looking for somewhere to stay while on holiday. Holiday lets can be found on websites such as Airbnb, Booking.com, and other platforms that showcase holiday rentals.
- No agency fees and commission, you keep 100% of the rental income after deducting tax and expenses. This can significantly boost your bottom line if you manage to secure a good amount of bookings yourself.
- Flexible rental rates meaning you can quickly adapt to the market if need be. (special deals/discounts)
- Trying to find a buy to let mortgage can be tricky.
- Time-consuming with all the marketing and maintenance involved with a holiday let.
- Never a guarantee it will be booked and could go empty for a long period of time.
Hotel lets are a more niche investment strategy. You would purchase a room within a hotel and generate income from guests staying there. Instead of having tenants, it would be those on business or holiday.
- Don’t have to deal with tenants so a hand-off strategy.
- Can make great returns if the hotel is situated in a popular location with high demand.
- If the hotel doesn’t have high demand there could be potential void periods.
- As the hotel is a business, if it fails this could damage your investment.
- If the hotel’s reputation takes a turn for the worse, this could impact demand.
Commercial Property Buy to Let
Commercial property investment is another form of buy to let strategy. With this, you would buy a unit within a commercial building. This can include a diverse range from office space to retail establishments. It could also include factories, industrial units, warehouses, and even leisure establishments such as gyms and bars. You would then rent the space out to companies and business owners.
- Commercial properties come with long leases, normally between 8-15 years.
- There can be certain tax advantages involved.
- Can be costly compared to residential buy to lets.
- Finding the right tenant can take longer meaning voids can also be longer.
- When there is a recession, commercial property is hit harder than residential property.
Buy to Sell (Flipping Property)
Buy to sell also known as flipping property is when you purchase a property that is in need of renovation work, this could be a property that is run down and needs renovating completely or features outdated designs and could do with an update. You would then make the necessary renovations to add value to the property and sell it for profit.
Unlike the buy-to-let strategy, this kind of property investment strategy doesn’t involve renting the property out to tenants meaning it’s a short-term investment. This also means that the only return on investment comes from growth in the property’s value.
- Potential to make large short-term returns if you can add value to the property with renovations and capital growth.
- Don’t have to deal with tenants and rental property management duties.
- A very practical method of property investing, requiring time and expertise to succeed.
- Could lose money if not done correctly.
- Can be costly depending on the level of renovation work needed to increase property value.
Commercial to Residential Conversions
This property investment strategy is less common but another viable option. With new planning laws, it is now easier to convert a commercial property into a residential property. You would take a commercial property such as a former office, a pub, etc, and renovate it to become one or more residential flats.
- If the commercial buy to let property isn’t performing, you can convert it to a more in-demand tenant market.
- Commercial property is normally quite centrally located therefore attractive residential lets.
- Expert knowledge is needed for this strategy.
- Can be costly and time-consuming.
- You may need planning permission involving architects, therefore another cost.
Property development is a more advanced option. You would either renovate an old property or develop a completely new property from scratch. This type of property investment strategy requires a lot more knowledge, time, and dedication. Once the property is finished, you would either list it as a buy to let or sell it for short-term profit.
- Total freedom of what you do with the property and how the property will look.
- Can make large short-term returns.
- A very hands-on method of property investing, requiring time and expert knowledge to succeed.
- Can be costly with limited returns if things don’t go to plan.
Rent to Rent
Rent to rent is another more niche strategy, this is when you rent a property from a landlord and then further rent it to a tenant. You would be responsible for finding tenants, maintaining the property, and paying the bills. The landlord can still receive the financial benefits of renting but doesn’t have to worry about handling property management duties. The rental cost you are required to pay will usually be discounted so that you can make a profit.
- Doesn’t require you to purchase a property.
- Can get started quickly and begin generating income.
- Returns are limited compared to other property investment strategies.
- Can not profit through capital appreciation.
- Not many landlords agree to this setup.
You should now be familiar with the different property investment strategies. No one strategy is correct, everyone’s journey will be different depending on the circumstances you are in. These are all great strategies that can potentially make you great returns if done correctly. With this in mind make sure you do as much research as you can first to eliminate the risk of things going wrong.
What property investment strategy makes you feel the most excited? Let us know in the comments below.